Even as advisors take advantage of an SEC rule that allows them to use client testimonials as part of their marketing, many still must worry about running afoul of state regulations.
A new "model" rule from North American Securities Administrators Association is aimed at changint that. Last week, NASAA approved a proposal meant to make state laws on advisor marketing and advertising conform with a marketing rule the Securities and Exchange Commission adopted in 2020 and began enforcing roughly two years later.
Among other things, the new SEC rule allowed advisors to take testimonials from clients who were happy with their services and add those statements to their websites and marketing materials. Wealth managers had long sought to make use of this type of self-promotion long common in many other industries.
Jaclyn Bowdren, the chief operating officer of the compliance consultant CRC-Oyster, said advisors generally seem to be enjoying their newfound freedom with client testimonials and third-party endorsements. But one nagging source of anxiety is still the risk that they'll trip up on state regulations even as they abide by the SEC's marketing rule.
"States have different rules on when you can just defer to your federal registration, while some states say, 'That's great that you're federally registered there, but you're also registered here, and this is how we interpret it,'" Bowdren said. "So it does still require that analysis to determine, 'Do we have some additional burden at the state level?'"
Like all NASAA model rules, the new one on marketing is merely a recommendation to states that they can adopt as they see fit. Bowdren said she's hopeful most state regulators will see the wisdom in eliminating differences between their rules and federal marketing standards.
"I'm not aware of any states that have said, 'This is great, NASAA, that you put this up, but we're going to continue to pursue our own approach," Bowdren said.
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The benefits of federal registration
Bowdren said advisory firms that are registered at the federal level generally only need to worry about the SEC's marketing rule. Broadly speaking, the SEC requires RIAs with $110 million or more in client assets to be federally registered but allows firms with between $100 million and $110 million to choose between federal or state registration. For advisors with less than $100 million, state registration is the only option.
"For our clients that are registered with multiple states, trying to track their regulatory burden across multiple state jurisdictions is difficult," Bowdren said. "So we're always trying to get our clients onto SEC registration, whenever possible, just to avoid the burden of answering to multiple states and multiple regulators."
Besides allowing testimonials and endorsements in advisor advertising, the SEC's new marketing rule adopted new standards for reporting the performance of past investments and permitted the use of investment projections. It also adopted a new basic definition of what constitutes an advertisement in the industry, saying it's any message advisors send to two or more current or potential clients about advisory services. One-on-one communications were exempted.
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Why firms are still hesitant with testimonials, endorsements
Joe Anthony, the CEO and owner of the marketing and public relations firm Gregory, said many firms remain reluctant to take advantage of the SEC marketing rule and make use of client testimonials. That could partly be a result of their size.
Testimonials have to be checked to ensure that they come from clients of a given advisor and don't contain misinformation. Large firms could struggle performing that sort of verification with all their advisors.
Even more than that, though, Anthony thinks wealth managers are still worried about doing something that regulators might label as wrong. Uniformity in state and federal rules would go a long way toward alleviating such anxieties, he said.
"This should remove some of the impediments, at least psychologically," Anthony said. "And, let's just say that if only over five years, 10% of advisors got on board, then I think in the next five years you're going to see another 50%. It's basically the tipping point for this."
For more on the SEC's marketing rule and advisors' marketing practices in general, scroll down:
Watch the fine print in your marketing, warns the SEC
For advisors touting testimonials and endorsements from clients, celebrities and other outside parties, the SEC's marketing rule requires that they disclose if any money has changed hands in exchange for these promotions.
An SEC "risk alert" from December warns that firms are sometimes failing to abide by this rule. Among other things, advisors too often think they can use hyperlinks and tiny footnotes to meet their disclosure requirements.
The SEC's risk alert offers various tips on how advisors can stay on the right side of the law.
Bad links, tiny notes: SEC warns advisors of marketing missteps
Marketing rule missteps that could put advisory firms at risk
Cliché marketing is bad, no marketing is worse
Marketing professionals say advisors often resort to stock industry words like "holistic" and "personalized."
Some of these terms may be unavoidable. But they shouldn't be relied on by firms trying to stand out in a crowded industry.
Meanwhile, studies show that advisors who aren't putting anything into marketing are going to have a hard time bringing in new clients and assets.
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